Tax Planning Under IRC § 1202 With Trusts and “Stacking” Strategies

Introduction to IRC § 1202 and the “Stacking” Strategy

IRC § 1202 provides a Qualified Small Business Stock (QSBS) gain exclusion that allows an individual or trust (any “taxpayer other than a corporation”) to exclude a significant amount of capital gain on the sale of QSBS[1][2]. In general, for stock acquired after September 27, 2010 and held more than 5 years, 100% of the gain can be excluded up to the greater of $10 million or 10× basis per issuer, per taxpayer[1][3]. This exclusion applies on a per-taxpayer, per-issuer basis. Crucially, multiple taxpayers holding QSBS in the same company can each claim their own $10 million exclusion on that issuer’s stock[4]. This gives rise to “QSBS stacking” – an estate planning technique of spreading stock ownership among multiple taxpayers (often via trusts or family members) so that each owner is entitled to a separate $10 million QSBS exclusion on a future sale[5][6].

Example: A founder holding QSBS worth $30 million might only exclude $10 million on a sale. By gifting portions of the stock to, say, three non-grantor trusts for the founder’s children, plus retaining some shares individually, up to four separate $10 million exclusions may be available (total $40 million excluded)[7][8]. Each trust and the individual are separate taxpayers, each eligible for a full QSBS exemption, provided all § 1202 requirements (5-year holding, original issuance, active business, $50 million assets, etc.) are met[5][4].

The stacking strategy can dramatically multiply tax-free gains, but it is not without risk. Abuse of multiple trusts or last-minute transfers can invite IRS challenges under various doctrines and anti-abuse rules (like the assignment of income doctrine and the multiple trust rule of § 643(f))[6][9]. This report surveys authoritative sources on QSBS trust planning – including IRS guidance, case law, tax literature, CLE materials, and practitioner commentary – focusing on grantor vs. non-grantor trust structures and the use of multiple trusts (“stacking”) to maximize the § 1202 exclusion. The information is organized by source type for clarity.

IRS Guidance and Commentary on QSBS Trust Planning

Statutory Framework: Section 1202 by its terms allows the exclusion to “a taxpayer other than a corporation”, which expressly includes trusts[2]. Moreover, § 1202(h) provides that certain transfers (gifts, inheritances, distributions from partnerships, reorganizations) are tax-free “carryover” transfers that do not disqualify QSBS; the transferee steps into the transferor’s shoes for holding period and original-issuance requirements[10][4]. Notably, § 1202(h) does not require any sharing or allocation of the $10 million cap between donor and donee – each qualified transferee may claim their own exclusion. The Code contains no rule aggregating or prorating the limit among related holders[4][11]. In other words, if a shareholder gifts QSBS to a family member or trust in a transaction that qualifies under § 1202(h), both the original holder and the donee can exclude up to $10 million of gain each on their respective shares, effectively multiplying the benefit[4][11].

Grantor vs. Non-Grantor Trusts: A critical IRS ruling in this context is Rev. Rul. 85-13, which holds that if a trust is treated as a grantor trust (the grantor is the owner for income tax purposes), then transactions between the grantor and trust are ignored[12][13]. Accordingly, transferring QSBS to a grantor trust is not a “transfer by gift” for § 1202(h) purposes, since the grantor remains the owner of the stock for income tax purposes[12][14]. The IRS would treat a sale by a grantor trust as a sale by the grantor, meaning no additional $10 million exclusion is gained by using a grantor trust[12][13]. Therefore, planners aiming to stack exclusions generally use non-grantor trusts, which are separate taxpayers. The IRS has acknowledged that a gift of QSBS to a non-grantor trust (assuming it’s a completed gift) allows the trust to qualify as a separate owner for its own § 1202 exclusion[15][16]. In a Private Letter Ruling, for example, the IRS ruled that a gift to an “ING” trust – an incomplete-gift, non-grantor trust – was incomplete for gift tax but treated as wholly owned by no single person for income tax (i.e. non-grantor trust)[15][16]. This illustrates that a properly structured non-grantor trust can be a valid additional taxpayer for QSBS purposes (whereas a grantor trust would not create a new taxpayer for the exclusion).

IRS No-Rule Policy and Anti-Abuse Concerns: The IRS has offered limited formal guidance on how many trusts or transfers are “too many” for QSBS stacking[6][17]. Section 643(f) (enacted in 1984) provides that the IRS can treat two or more trusts as one if they have “substantially the same grantor and substantially the same primary beneficiary” and if “a principal purpose” of establishing multiple trusts is avoidance of federal income tax[6][18]. For decades this statute lay dormant without regulations. In 2018, proposed regulations under § 643(f) were issued (as part of the § 199A pass-through deduction guidance) with a strong anti-avoidance rule targeting the use of multiple trusts to dodge tax thresholds[18][19]. The proposal even created a presumption that significant income tax benefits achieved by using separate trusts (such as stacking QSBS exclusions) indicate a principal purpose of tax avoidance[20]. However, the final § 199A regulations omitted that presumption, leaving the determination case-by-case[20].

In early 2023, Treasury finalized regulations under § 643(f) (effective in the CFR as 26 C.F.R. § 1.643(f)-1) which restate the statute’s broad rule: multiple trusts with same grantor and beneficiary, formed for tax avoidance, will be consolidated for tax purposes[21]. The regulation also clarifies that spouses are treated as one grantor for § 643(f) (closing a potential loophole of using each spouse to establish “separate” trusts)[22]. The IRS considers this area highly sensitive – indeed, in Rev. Proc. 2023-3 the Service announced it will not issue Private Letter Rulings on whether multiple trusts should be treated as one under § 643(f)[23][24]. This means taxpayers cannot easily obtain upfront IRS blessing on a multi-trust QSBS plan. Instead, advisors are guided by general anti-abuse principles: use distinct, independent trusts with genuine non-tax motives to avoid having them collapsed into one[25][26].

IRS Administrative Guidance: Other IRS guidance has touched tangentially on QSBS trust planning or related issues:

• Private Letter Rulings: While the IRS refuses to rule on multiple trusts per § 643(f), it has addressed other QSBS issues. For example, PLR 201908006 confirmed that a transfer to an incomplete gift non-grantor trust could qualify as a § 1202(h) “transfer by gift” (the donor did not remain owner for income tax)[15][16]. Earlier PLRs (e.g. PLR 201436001 and 201717010) have examined what businesses qualify as “qualified trades or businesses” for QSBS purposes[27], but those focus on the corporate active-business requirement, not trust strategies. In PLR 202244004 (Aug. 9, 2022), the IRS granted relief for a late QSBS rollover election under § 1045[28][29]. Notably, that PLR described a scenario where a partner sold QSBS before 5 years, reinvested proceeds into two new QSBS companies, and thus stood to ultimately claim two separate $10 million exclusions (one per new issuer)[30][29]. The IRS allowed a late election, implicitly facilitating this form of “packing” QSBS (using § 1045 to multiply the number of $10 million exclusions via reinvestment into multiple issuers)[31][29]. The IRS did not object that this was abusive, suggesting that as long as statutory requirements are met (separate issuers, timely rollover), multiplying exclusions across entities is permitted.
• Chief Counsel Advice / GLAMs: In 2023, the Office of Chief Counsel issued a Generic Legal Advice Memo (GLAM 2023-006) highlighting an abusive trust scheme (unrelated to QSBS specifically, but relevant to trust tax avoidance). Promoters were marketing a nongrantor trust strategy claiming that by allocating gains to corpus and not distributing, the trust could avoid current income tax[32][33]. The GLAM debunked this, noting that trust accounting income vs. taxable income are different, and that a trust must pay tax on its capital gains unless properly distributed[34][35]. While this GLAM did not involve § 1202, it signals the IRS’s heightened scrutiny of “too-good-to-be-true” trust shelters. The IRS is alert to aggressive uses of trusts to avoid tax and has the tools (like § 643(f), the assignment of income doctrine, and substance-over-form) to challenge them[36][37]. The IRS Priority Guidance Plan for 2023-2024 even lists QSBS issues (e.g. clarifying § 1202 holding periods and other rules) as areas of focus[38], so additional guidance may be forthcoming.

In summary, IRS commentary acknowledges QSBS stacking is allowed – each non-grantor trust or individual donee gets their own $10 million exclusion[4][11] – but emphasizes that stacking must be done in good faith, with distinct trusts and compliance with all technical requirements[25][26]. The IRS will not rule in advance and stands ready to invoke anti-abuse rules if taxpayers establish artificial or duplicative trust structures primarily to dodge taxes[6][17].

Judicial Cases on QSBS and Trust Planning

Relatively few cases have interpreted § 1202, and none to date squarely address a contested multi-trust stacking arrangement. However, several federal cases (and one notable state case) provide guidance on related issues – from what constitutes qualified stock, to assignment-of-income in gifting stock, to trust vs. beneficiary ownership. Key cases include:

• Owen v. Commissioner, T.C. Memo 2012-21: This was the first Tax Court case interpreting § 1202. Though it did not involve trusts, it clarified the definition of a “qualified trade or business” for QSBS. The IRS argued a C-corp selling prepaid legal service plans was a disqualified personal services business (since its success depended on the owners’ reputations/skills). The Tax Court disagreed, holding that the corporation’s principal asset was not the owners’ skill – even if owner talent drove the business – and thus it was a qualified business[39][40]. Owen illustrates a judicial willingness to construe QSBS rules liberally for taxpayers in gray areas. It’s often cited to reassure that § 1202’s exclusions can apply even in close calls, but it did not involve any estate planning transfer.
• Estate of Hoensheid v. Commissioner, T.C. Memo 2023-34: This recent Tax Court case (decided March 2023) did not involve QSBS, but a gift of stock to charity immediately before a sale. The IRS invoked the assignment of income doctrine, arguing the donor’s estate owed tax on gain because the donation occurred after a buyer was essentially in place. The Tax Court agreed, finding the gift was made after a binding obligation to sell had arisen – meaning the gain was the donor’s, not the charity’s. While Hoensheid concerned a charitable donee, its lessons “are clearly relevant for founders and early shareholders hoping to stack QSBS and avoid assignment of income”[41][42]. The assignment of income doctrine can undo a tax-free transfer if the transaction is viewed in substance as the donor’s prearranged sale followed by a distribution of proceeds. The court in Hoensheid emphasized no single factor is determinative (e.g. a donee’s legal obligation to sell is important but not the sole test)[43]. The takeaway for QSBS planners is that timing matters: gifts or trust transfers should be made well before any sale is certain. If a founder waits until a merger agreement is signed or an IPO is imminent, the IRS could argue the transfer lacks independent purpose and simply diverts income that was already earned (triggering assignment-of-income taxation on the grantor)[44][9]. Thus, to successfully stack exclusions, donors must transfer QSBS early, when a future sale is only a hope, not a done deal.
• Ju v. United States, 166 Fed. Cl. 173 (2024): This is the first federal court decision addressing a taxpayer’s claim of the QSBS exclusion in litigation (a refund suit in the U.S. Court of Federal Claims). Ju highlights the importance of substantiation and satisfying all technical requirements. Dr. Ju sold stock and claimed the § 1202 exclusion, but the court denied it because he failed to prove two key elements. First, he could not prove the issuing corporation’s gross assets were under $50 million at all relevant times – he provided some financial statements from years after issuance, but nothing at the actual issuance date, and the court held the burden of proof was on the taxpayer to show the $50 million test was met[45][46]. Second, part of his shares failed the 5-year holding period – he argued he constructively owned them earlier via a contract, but the court found the shares were not transferred to him until a 2015 settlement, less than five years before sale[45][47]. In sum, Ju underscores that taxpayers must maintain solid documentation of QSBS eligibility (ownership dates, asset size of the company, business type, etc.)[48][46]. Even in a friendly estate plan context, if the IRS audits a trust’s or beneficiary’s QSBS exclusion, they will require proof that the stock was originally QSBS and held >5 years[45][46]. Ju put taxpayers on notice: failing to gather records (e.g. corporate financials around the time of stock acquisition) can be fatal to the exclusion[45][46]. For trust planners, this means performing due diligence on QSBS status before transferring stock into trusts and ensuring that trusts (or those advising them) retain the needed evidence to defend § 1202 on a later sale.
• Emilia A. Aciu v. Dir., N.J. Division of Taxation, 29 N.J. Tax 409 (N.J. Tax Ct. 2012): This New Jersey Tax Court case illustrates that state tax law may not follow federal QSBS rules. The taxpayer sold QSBS and claimed the federal 50% exclusion (available for stock acquired in the late 1990s)[49]. She then amended her New Jersey return to exclude that gain, arguing NJ should respect the federal exclusion[50][51]. The court disagreed and upheld the state’s denial of the refund. It held that NJ’s tax statute did not incorporate the federal § 1202 exclusion, despite the state tax form instructions implying federal treatment would carry over[52][53]. Ultimately, the court affirmed the Director’s decision to tax the full gain, finding no provision in NJ law to exclude QSBS gains[54]. Aciu is a cautionary note: state conformity varies. Some states (NY, NJ, etc.) generally conform to federal income definitions and thus honor the QSBS exclusion, while others (California, Pennsylvania, among others) explicitly decouple and tax the gain in full[55][56]. Additionally, certain high-tax states have targeted specific trust strategies – e.g. New York passed legislation treating ING trusts as grantor trusts for state tax purposes to prevent state income tax avoidance[57][58]. For QSBS planners, this means a trust may save federal tax but still owe state tax on the gain, depending on the trust’s residence and state laws. In New York, for example, a resident’s sale of QSBS inside a so-called NING trust (Nevada incomplete gift trust) might not escape state tax beyond the grantor’s own $10 million exclusion[57][58] – a contested issue that New York has not definitively resolved[59][60].

In summary, case law reinforces several principles: (1) Plan early – transfers made too late invite assignment-of-income risk[42][43]; (2) Follow the rules exactly – taxpayers and trusts bear the burden to prove all QSBS conditions (holding period, original issuance, asset limits, qualified business)[45][46]; (3) Be mindful of state law – federal strategies might not reduce state taxes[55][61]; and (4) Use separate, legitimate trusts – if multiple trusts look like clones created only to multiply exclusions, a court could collapse them under § 643(f) or general substance-over-form doctrines (though as of now, this remains a theoretical risk since no reported case has applied § 643(f) to a QSBS trust stack). The absence of direct stacking litigation suggests that, so far, careful planners have stayed under the radar by respecting these guardrails.

Commentary in Legal Journals and Tax Publications

Tax academics and practitioners have analyzed QSBS trust strategies extensively, especially as QSBS gained popularity after the 2010 100% exclusion and the 2017 TCJA’s lower corporate tax rates[62][63]. Key issues discussed in journals include how to execute stacking safely and the unresolved “gray areas” where official guidance is lacking[64][65]. Below is an overview of insights from reputable tax publications:

• The Tax Adviser (AICPA) – “Gray Areas in QSBS Estate Planning” (Lederman & Casteel, Apr. 2024): This article provides a comprehensive look at QSBS estate planning uncertainties. It confirms that “stacking QSBS exclusions” is a well-recognized strategy achieved by “gifting QSBS to one or more family members and/or irrevocable trusts treated as nongrantor trusts, each of which is eligible for a QSBS exclusion”[5][66]. The authors emphasize doing such gifts early, when values are low, to use little of one’s gift tax exemption[67]. A central “gray area” discussed is “How many trusts are too many?” – there is “no bright-line rule”, but § 643(f) and its new regulations are the key constraints[6][18]. The article advises using one trust per beneficiary (e.g. one for each child) to avoid having “substantially the same” beneficiary across trusts[25][68]. It notes many advisors also feel comfortable adding one “pot trust” for all children in addition to individual trusts[69]. To bolster the separateness of each trust, it recommends documenting non-tax purposes (asset protection, tailored management for each beneficiary, etc.), appointing different trustees, and varying distribution patterns[26][70]. The article also explores using INGs (incomplete gift non-grantor trusts) and charitable remainder trusts (CRTs) as additional stacking vehicles, since both are separate taxpayers without using gift exemption[71][72]. It cautions that New York and California will tax ING trust gains as if the grantor earned them (eliminating the state benefit of the trust)[73][74], and it flags that the treatment of excluded QSBS gain inside a CRT’s tiered distribution system is unclear (i.e. whether the tax-free gain retains its character when paid out to the income beneficiary)[75][76]. The overall tone is optimistic about stacking’s benefits – “exceptional tax results” – but realistic about the “unsettled” law and risk of IRS or state challenge, urging a cautious, well-documented approach[77][78].
• NYU Tax Law Review / NYSSCPA – “Estate Planning for Founders: Transfers of QSBS by Gift” (Goffe & Haghani, Oct. 2022): Published for a CPA audience, this article dives deeply into the mechanics of § 1202(h) and forcefully argues that completed gifts to separate taxpayers are what Congress intended to allow multiple exclusions[4][11]. It points out that “there is no rule under IRC section 1202 that aggregates or prorates the eligible amount of QSBS exclusion among a transferring shareholder and qualified transferees”[4][11] – each can have their own $10 million. The authors clarify an important nuance: a gift to a grantor trust does not count as a transfer for § 1202 because of Rev. Rul. 85-13 (grantor still owns it)[12][13]. They contrast “gift” in the income tax sense with gift for transfer tax: a gift can be complete for gift tax yet incomplete for income tax (as with a grantor trust scenario)[79][80]. Conversely, an ING trust gift is incomplete for gift tax but complete for income tax (nongrantor trust), which does create a new QSBS holder[81][82]. The article cites Commissioner v. Beck’s Estate and Commissioner v. Duberstein to reinforce that gift treatment differs between tax regimes and one should not import gift-tax concepts (like needing a taxable gift) into § 1202’s use of the word “gift”[79][80]. In their view, the only requirements for a valid § 1202(h) gift are donative intent and a separate identity of the donee for income tax[83]. They then enumerate concrete strategies, much like a checklist:
• Outright gifts to individuals: straightforward and each individual gets their exclusion[84].

• Completed gifts to nongrantor trusts: use some estate exemption to gift to irrevocable trusts; avoid overlapping beneficiaries to sidestep § 643(f)[85][86].
• Incomplete gift (ING) trusts: transfer QSBS to a trust in a no-tax state with a distribution committee, so it’s nongrantor without using exemption[85]. They note NY’s law taxing ING income as grantor-trust income could claw back the state benefit if the exclusion exceeds the grantor’s own $10 million[59][60], but argue that if the gain is fully excluded federally, there is no federal taxable income to add back, so perhaps no NY tax – an issue of debate[59][87].
• GRATs (Grantor Retained Annuity Trusts): The trust itself is grantor (so no separate exclusion during the GRAT term), but they suggest gifting the remainder interest in a QSBS-holding GRAT to a family member or nongrantor trust so that when the GRAT ends (after 2–3 years), the remainder owner can claim an exclusion on a subsequent sale[88][89]. Essentially, the GRAT freezes value and any QSBS growth passes to the remainder donee, who can exclude it – but timing a sale post-GRAT is tricky, and the GRAT must run at least 5 years or the donee must tack the grantor’s prior holding period.
• Charitable Remainder Trusts: A “flip CRUT” can be used where QSBS is donated to the CRT (no immediate tax on sale since CRT is tax-exempt) and later pays the donor or family an income stream[90][91]. The CRT’s distributions carry out income by tiers; the authors note that excluded QSBS gain should fall into the tax-exempt tier (perhaps distributed as nontaxable corpus) so that when paid to the individual it remains tax-free[92][93]. However, they acknowledge uncertainty in how an excluded gain is classified under the CRT tier rules[75][76]. Still, a CRT can effectively convert a potentially taxable sale into a diversified stream of mostly tax-free payments (with philanthropic benefit of the remainder to charity).

This article’s detailed technical analysis supports the idea that, legally, stacking is permissible as long as the letter of § 1202 is observed. It also reminds practitioners to watch for recent developments like the new § 643(f) regulation and state anti-ING rules, which are moving targets.

• Tax Notes Federal – “Stacking QSBS: Anticipatory Assignment” (Karachale & Osheroff, July 24, 2023): This piece in Tax Notes zeroes in on the assignment-of-income risk for QSBS gifts in anticipation of a sale. The authors use Estate of Hoensheid (discussed above) as a springboard to analyze when a pre-sale transfer might be recharacterized[94][42]. They point out that even if § 1202(h) technically allows a last-minute gift (since the donee can tack the holding period and original issuance), the economic reality may cause the IRS to assert the gain was already accrued to the donor. The article likely references factors from case law: was there a binding agreement, had the buyer effectively assumed control, etc., by the time of transfer[42][43]. The key recommendation is that founders not wait until the eleventh hour to implement QSBS gifts. Instead, they should transfer shares to trusts or family members well before term sheets harden into purchase agreements. Not only does this avoid assignment-of-income issues, but it also starts the clock on the donee’s 5-year holding (if the original owner hasn’t met it yet) much earlier, reducing the risk of a premature sale. In sum, this commentary adds a practical warning: timely execution of the stacking plan is as important as the plan itself.
• Estate Planning Journal / Trusts & Estates Magazine: Various practitioner journals have published pieces on QSBS. Common themes include using dynasty trusts in no-tax jurisdictions to shield the gain from state tax as well as federal (e.g. a Delaware trust for a California resident, as highlighted by ACTEC and others)[7][8]. Also, discussions of “packing” strategies often accompany “stacking.” Packing refers to maximizing the exclusion for one person by holding multiple QSBS investments (since the $10 million cap is per issuer)[30]. For example, instead of one $30 million startup, an entrepreneur might invest in three $10 million startups, or use the § 1045 rollover to spread gains into several QSBS replacements, thereby getting $10 million × 3 exclusions[30][95]. This is more of an investment strategy, but many articles note it in conjunction with trust stacking. The bottom line from professional literature is that QSBS offers powerful opportunities – deemed by some “the greatest thing since sliced bread” in small business tax planning[96][97] – yet it carries traps for the unwary. Publications stress advisor coordination and careful compliance to withstand IRS scrutiny, analogizing the burgeoning interest in QSBS to other over-hyped tax breaks that later drew IRS crackdowns (for instance, the warning that QSBS could become a “minefield if misused or overpromoted,” just as the ERC credit did)[98][37].

CLE Materials and Conference Insights (ABA, ALI-CLE, Estate Planning Conferences)

Sophisticated planning techniques for QSBS have been a hot topic at continuing legal education (CLE) events and estate planning conferences (such as the Heckerling Institute). These forums often share cutting-edge strategies and also candidly discuss IRS audit experiences. Key points from such materials include:

• Heckerling Institute 2019 – “QSBS: Quest for Quantum Exclusions” (Lee, Comeau, Kwon, Long): This presentation by leading trust and tax experts provided a roadmap for multiplying QSBS exclusions. One slide explicitly listed potential QSBS holders: “Individual; Non-Grantor Trust; Incomplete Gift Non-Grantor Trust; Pot trust to separate trusts for each beneficiary”, etc., highlighting that each such entity could claim its own per-issuer limit[99]. The presenters likely demonstrated scenarios of breaking a single family’s stock across multiple trusts (“pot trust to separate trusts”) and discussed toggling trust grantor status. For instance, one strategy mentioned is terminating grantor trust status prior to a sale so that a trust becomes a separate taxpayer just in time (though one must ensure that termination itself is not a realization event)[100]. They also included a table of “Movement of QSBS Shares: Other Transfers” describing whether QSBS status and exclusion carry over in various events (grantor trust becomes non-grantor, conversions, bequests, etc.)[101][100]. A noteworthy insight was that if a grantor trust ceases to be grantor (e.g. via a “toggle” or perhaps the grantor’s death), that can create a new taxpayer who may use a separate $10 million exclusion, whereas during the grantor trust phase it could not[101]. The materials likely emphasized planning around the grantor’s death: death causes a trust to become a non-grantor trust (separate taxpayer) and also is a § 1202(h) transfer by death (which retains QSBS character)[10]. Thus, if a founder dies holding QSBS in a revocable (grantor) trust, the trust’s transition to an irrevocable non-grantor trust at death might entitle the trust (now effectively the estate or successor trust) to its own $10 million exclusion, in addition to what the decedent might have used while alive. This raises complex but interesting opportunities in estate administration of QSBS.
• ABA Section of Taxation & ALI-CLE: Presentations at ABA Tax Section meetings and ALI-CLE seminars have addressed QSBS planning. For example, an ABA Tax webinar in 2021 noted the then-proposed Build Back Better Act’s attempt to cut the QSBS exclusion to 50% for high-income taxpayers, which prompted discussion on accelerating sales or diversifying trust strategies (ultimately that proposal did not become law). State Bar association tax conferences (e.g. California Tax Bar 2021 meeting) also tackled QSBS, particularly how state nuances (like California’s prior QSBS ban, struck down in Cutler v. Franchise Tax Bd. (2012) on constitutional grounds) affect planning[55]. One recurring CLE tip: practitioners often advise splitting family holdings among multiple trusts early, but avoiding cookie-cutter trusts. Setting up, say, five identical Nevada trusts on the same day for the same beneficiary, each funded with QSBS, is risky under § 643(f). Instead, CLE speakers recommend using different beneficiaries or staggered creation times and funding levels. Some have even suggested using non-tax reasons for multiple trusts – for example, one trust might be focused on education, another on a future business venture – to help demonstrate that tax avoidance is not the “principal purpose”[25][26].
• ACTEC (American College of Trust and Estate Counsel) 2021 Podcast – “Don’t Guess and Make a Mess with QSBS”: In this educational session, an ACTEC fellow explains QSBS fundamentals and planning tools in plain language. The speaker strongly advocates using non-grantor trusts for clients in high-tax states: “in the world of trust and estate planning…non-grantor trusts are the way to go with qualified small business stock”[102]. They describe a scenario of a founder creating three non-grantor trusts for three children, funding each with, say, $3.9 million of QSBS (using up the gift exemption)[103][104]. Each trust would get its own $10 million exclusion, and if situated in a state like Delaware, the trusts would also avoid state income tax on the sale[7][8]. Meanwhile the founder retains some stock and uses their own $10 million exemption, albeit paying state tax if in California, for example[7][105]. The ACTEC discussion also clearly warns of the multiple trust rule: if trusts “start to look too similar” and one creates too many, § 643(f) may treat them as one[106]. This admonition from experienced estate counsel mirrors the advice in written articles – the pattern is to use a few well-differentiated trusts rather than an extreme number of virtually identical trusts.

In essence, CLE and conference materials confirm practitioners’ confidence in stacking as a viable strategy, while hammering home compliance and optics: use legitimate, independent trusts and don’t push beyond the limits of the anti-abuse rules. They also highlight creative variations (like toggling grantor status or using CRTs/GRATs) to integrate QSBS planning with other estate planning goals.

Finally, these forums frequently note the audit risk: while § 1202 claims were rare historically, the surge of tech startup liquidity events after 2018 means the IRS is now paying attention[107][65]. Practitioners share that IRS examiners have started to ask detailed questions on QSBS transactions. For example, documentation of the corporation’s $50 million asset test and active business status might be requested years after the fact. And if a tax return shows multiple trusts all excluding gain from the same company sale, that could be a bright red flag. Therefore, advisors presenting at CLEs universally stress thorough record-keeping and conservative implementation of trust strategies to withstand an audit on § 1202[45][46].

Practitioner White Papers and Planning Guides

Law firms, accounting firms, and financial advisors have produced numerous white papers and client guides on leveraging § 1202 with trusts. These practitioner-oriented writings often synthesize IRS rules and practical experience:

• Firm Memos on “Stacking”: Many estate planning law firms have published articles with titles like “Maximizing Section 1202’s Exclusion” or “QSBS – Stacking and Packing.” These typically outline how a taxpayer can gift QSBS to a non-grantor trust as a completed gift and achieve an exclusion for the trust in addition to the donor’s exclusion[108]. A common refrain is that a transfer to a non-grantor trust is treated as a “gift” for federal income tax – exactly what § 1202(h) contemplates[108]. For instance, a Frost Brown Todd article notes that transferring QSBS to a nongrantor irrevocable trust is generally a non-recognition event (a gift, not a sale) and therefore the trust can sell the stock after 5 years and claim its own $10 million exclusion[108]. It also emphasizes that the holding period tacks – the trust benefits from the donor’s original acquisition date[5][66].
• Risk Mitigation – 643(f) and Substance: Practitioner guides invariably mention § 643(f). A KMK Law article, for example, explains that if multiple trusts have the “same grantors and beneficiaries” and tax avoidance is a principal purpose, the IRS can treat them as one – thereby negating the intended multiple exclusions[109]. To manage this, they recommend using different beneficiaries or perhaps incorporating spouses or charities as differing beneficiaries to break the “substantially same” pattern. Some planners suggest a “discretionary spray” trust for a class of beneficiaries as a way to have an additional trust that isn’t duplicative of the single-beneficiary trusts (though this is essentially the “pot trust” concept, which must be used carefully)[110][26].
• State Tax and Residency Planning: Wealth management firms highlight that choosing the right trust situs can save substantial state tax on a QSBS sale. For example, a California founder might establish Delaware or Nevada non-grantor trusts that are carefully structured to avoid CA tax (no CA trustees, no CA resident beneficiaries during administration, etc.). If done properly, the trust’s sale of QSBS could be free of both federal and state tax[104][8]. But these white papers also caution about the California “throwback” rules and other state-specific issues that could tax accumulated gains when distributed to a resident beneficiary. Thus, often the advice is to time distributions or potentially move beneficiaries to low-tax states if a large post-sale distribution will occur.
• Combining Trust and Non-Trust Strategies: Some commentaries discuss balancing the use of non-grantor trusts against using grantor trusts or other techniques. The BDO Bloomberg Tax article (2024) on ESOP and QSBS planning notes that non-grantor trusts are advantageous for QSBS exclusions, especially if the client already wants a trust for estate planning or asset protection reasons[111][112]. However, it also acknowledges that grantor trusts have their own benefits (e.g. paying income tax out of the grantor’s pocket can further reduce the estate). Therefore, one should do a “break-even analysis” – e.g., if the stock is expected to appreciate far beyond $10 million in gain, a grantor trust might eventually save more total tax (by using grantor tax payments as additional gifts) than a nongrantor trust would with the extra $10 million exclusion[113][114]. In some situations, a hybrid approach is possible: for instance, use a grantor trust until near the liquidity event (for estate freeze benefits), then toggle it to nongrantor status before the sale to utilize a separate $10 million exclusion[100][99]. This is sophisticated planning and would require careful execution (and likely a PLR is not available for comfort), but it shows how top practitioners are thinking two steps ahead to maximize tax benefits while managing risks.
• Audit and Compliance Focus: Practitioner guides, especially those by tax attorneys, often include checklists for audit preparedness. They suggest assembling a binder with: corporate charter, stock purchase agreements or subscription documents (to prove original issuance), cap tables or financial statements proving asset size at issuance, documentation of the company’s business activities to show it wasn’t a prohibited business, and gift documents or trust instruments to show the details of any transfers. Since trusts might sell the stock years after the initial gift, the responsible parties (trustees and advisors) must retain this evidence. The Hanson Bridgett “QSBS Investor’s Hub” even provides form language and templates for companies to certify QSBS status to shareholders[115]. For multiple trusts, advisors recommend keeping separate records for each trust’s administration to demonstrate they are independent (different investment accounts, perhaps different investment policies, and clearly segregated assets). All of this is aimed at showing, if ever challenged, that the plan complies with both the letter and spirit of the law.

To illustrate the core planning considerations and pitfalls discussed by practitioners, below is a summary table of Common Trust-Based QSBS Strategies and their features:

As shown, each technique has pros and cons. Practitioners often layer strategies (for instance, a founder might gift some shares outright to family, some to a non-grantor dynasty trust, and some to a donor-advised fund or CRT, achieving a mix of benefits: multiple exclusions, charitable deductions, state tax avoidance, etc.). The consistent thread is that non-grantor trusts are the linchpin of stacking for family members[102][117].

Conclusion

Planning with Qualified Small Business Stock can significantly reduce or eliminate capital gains tax for entrepreneurs and investors, and the inclusion of trusts in that planning can multiply the tax savings. Grantor and non-grantor trusts play very different roles: a grantor trust keeps the stock’s tax attributes with the grantor (no new § 1202 limit, but other estate tax benefits), whereas a non-grantor trust is a separate taxpayer eligible for its own $10 million exclusion[12][13]. The technique of “stacking” multiple QSBS exclusions using gifts to multiple non-grantor trusts is well-established in practice and supported by the statute’s silence on aggregating limits[4][11]. Indeed, both IRS rulings and commentary acknowledge that each taxpayer can get a full exclusion, and transfers by gift (or at death) carry over the necessary holding period and qualification without splitting the benefit[10][4].

However, this area sits at the intersection of evolving tax policy and anti-abuse enforcement. Planners must heed IRS guidance: avoid the creation of carbon-copy trusts with no purpose other than tax avoidance, lest § 643(f) be invoked[18][20]. They must also respect judicial doctrines like assignment of income – meaning transfers should not be done on the eve of a liquidation in form but not in substance[41][42]. The safest path to stacking is early, proactive planning: set up well-differentiated trusts years in advance of an exit, and ensure all QSBS qualifications are scrupulously met and documented[45][46]. By doing so, families can legitimately secure multiple $10 million tax exclusions, exactly as § 1202 (in combination with § 1202(h)) permits[4][11].

Finally, it is important to stay abreast of developments. The IRS may issue further guidance or initiate audits that provide more clarity (or raise new questions) on QSBS trust arrangements. Tax planners are advised to watch the Priority Guidance Plan and any new case law for updates on how far one can go in stacking and what safeguards should be observed. In the meantime, with careful structuring and an eye toward the economic reality of each trust, QSBS stacking with grantor and non-grantor trusts remains a powerful tool – one that can turn a $10 million tax break into a $20, $30, or $50 million (or more) tax victory for a successful entrepreneur’s family[7][8].

Sources:

• Internal Revenue Code § 1202 and § 1202(h); 26 C.F.R. § 1.643(f)-1 (2023)[19][22].
• Arielle Lederman & Heather D. Casteel, “Qualified Small Business Stock: Gray Areas in Estate Planning,” Tax Adviser, Apr. 2024[6][25].
• Alicia G. Goffe & Nima H. Haghani, “Estate Planning for Founders…Transfers of QSBS by Gift,” NYSSCPA Tax Stringer, Oct. 2022[4][12].
• Christopher Karachale & Ethan Osheroff, “Stacking Qualified Small Business Stock: New Guidance on Anticipatory Assignment,” Tax Notes Federal, July 24, 2023 (p. 523)[44][43].
• George F. Bearup, “Qualified Small Business Stock Update,” Greenleaf Trust Missives, Apr. 26, 2023[31][29].
• Nancy E. Dollar, “QSBS Holding Period and $50 Million Test in Ju v. United States: A Patent Oversight,” Hanson Bridgett Alert, Apr. 8, 2024[45][46].
• Estate of Hoensheid Commissioner, T.C. Memo 2023-34 (U.S. Tax Court 2023)[42][43].
• Owen Commissioner, T.C. Memo 2012-21 (U.S. Tax Court 2012)[39][40].
• Ju v. United States, 166 Fed. Cl. 173 (Ct. Fed. Cl. 2024)[45][46].
• Emilia A. Aciu Director, 29 N.J. Tax 409 (N.J. Tax Court 2012)[52][54].
• ACTEC Foundation Podcast (P. Lee), “Don’t Guess and Make a Mess with QSBS,” Oct. 2021[7][8].
• BDO USA (Bloomberg Tax), “ESOPs Offer Tax-Efficient Business Succession in an Estate Plan,” Jan. 2024[2][111].
• RSM, “The OBBBA and QSBS: Opportunities and Risks,” Nov. 2023[98][37].
• Proc. 2023-3, § 3.01(90) (no-ruling on multiple trusts)[20][24]; Rev. Rul. 85-13 (grantor trust owner for income tax)[12][13]; PLR 201908006 (incomplete gift nongrantor trust)[15][16].

[1] [28] [29] [30] [31] [95] Qualified Small Business Stock Update – Greenleaf Trust

https://greenleaftrust.com/missives/qualified-small-business-stock-update-2/

[2] [3] [111] [112] [113] [114] ESOPs Offer Tax-Efficient Business Succession | BDO

https://www.bdo.com/insights/tax/esops-offer-tax-efficient-business-succession-in-an-estate-plan

[4] [10] [11] [12] [13] [14] [15] [16] [55] [56] [61] [79] [80] [81] [82] [83] [84] [85] [86] [88] [89] [90] [91] [92] [93] [116]  Estate Planning for Founders and Investors in Venture-backed Companies: Transfers of Qualified Small Business Stock by Gift

https://www.nysscpa.org/most-popular-content/estate-planning-for-founders-and-investors-in-venture-backed-companies-transfers-of-qualified-small-business-stock-by-gift

[5] [6] [17] [18] [19] [20] [22] [23] [24] [25] [26] [57] [58] [59] [60] [62] [63] [64] [65] [66] [67] [68] [69] [70] [71] [72] [73] [74] [75] [76] [77] [78] [87] [107] [110] Qualified small business stock: Gray areas in estate planning

https://www.thetaxadviser.com/issues/2024/apr/qualified-small-business-stock-gray-areas-in-estate-planning/

[7] [8] [96] [97] [102] [103] [104] [105] [106] [109] [117] Don’t Guess and Mess When Planning with QSBS | Qualified Small Business Stock

https://actecfoundation.org/podcasts/2021-qsbs-qualified-small-business-stock/

[9] [41] [42] [43] [44] [94] Tax Notes Federal

https://www.hansonbridgett.com/sites/default/files/2023-08/Stacking%20Qualified%20Small%20Business%20Stock.pdf

[21] 26 CFR § 1.643(f)-1 – Treatment of multiple trusts. – Law.Cornell.Edu

https://www.law.cornell.edu/cfr/text/26/1.643(f)-1

[27] [39] [40] Section 1202: A Big Deal for Small Business

https://www.americanbar.org/groups/taxation/resources/tax-times/archive/section-1202-big-deal-small-business/

[32] [33] [34] [35] Chief Counsel Discusses Trust Structure Marketed as a Tax Shelter

https://tax.thomsonreuters.com/news/chief-counsel-discusses-trust-structure-marketed-as-a-tax-shelter/

[36] [37] [98] The OBBBA and QSBS: Opportunities and risks involving 1202

https://rsmus.com/insights/services/business-tax/obbba-tax-qsbs-1202-opportunities-risks.html

[38] [PDF] 2023–2024 Priority Guidance Plan – IRS

https://www.irs.gov/pub/irs-counsel/2023-2024-priority-guidance-plan-initial-version.pdf

[45] [46] [47] [48] QSBS Holding Period and $50 Million Test in Ju vs. United States: A Patent Oversight | Hanson Bridgett

https://www.hansonbridgett.com/publication/240408-7000-qsbs-holding-ju-vs-united-states-patent-oversight

[49] [50] [51] [52] [53] [54]  EMILIA A. ACIU v. DIRECTOR :: 2012 :: New Jersey Tax Court Decisions :: New Jersey Case Law :: New Jersey Law :: U.S. Law :: Justia

https://law.justia.com/cases/new-jersey/tax-court/2012/20999-10.html

[99] [100] [101] [PDF] QSBS: The Quest for Quantum Exclusions (Queries, Qualms, and …

https://media.law.miami.edu/heckerling/2019/Supplemental%20Materials/II-A.pdf

[108] Maximizing Section 1202’s Gain Exclusion – Frost Brown Todd

https://frostbrowntodd.com/maximizing-the-section-1202-gain-exclusion-amount/

[115] Tax Court Ruling (Ju v. United States) Shows When Claiming QSBS …

https://www.qsbsexpert.com/tax-court-ruling-ju-v-united-states-shows-when-claiming-qsbs-documentation-is-key/

Disclaimer:
The information provided in this post is for educational and general informational purposes only and does not constitute legal, tax, financial, or other professional advice. Laws, regulations, and interpretations are subject to change frequently and may vary by jurisdiction. You should not rely solely on this information when making decisions affecting your personal circumstances. Please consult with a qualified attorney, tax advisor, or financial professional for advice specific to your situation. The transmission or receipt of this information does not create an attorney-client relationship or any other professional relationship. This post may be considered advertising under applicable state laws.